Debts are a normal part of business. Sure, this part may be considered undesirable by some people but the fact remains that all businesses have liabilities. Thus, there are different implications reached when a business gets rid of all its debt. Business debt elimination is very tricky. There are two explanations that can be used when a business suddenly becomes free of debt:
1) Bankruptcy – Some people would turn pale at the mere mention of this word. Many people think that bankruptcy is a very rare occurrence. They reason to themselves that losing one’s entire fortune is impossible. However, bankruptcy is actually more common than you might think.
When a company no longer has the ability to pay off creditors, the company often declares bankruptcy. This immediately dissolves your debt. However, certain consequences come with bankruptcy. If you make use of this business debt elimination strategy, your net income will be restricted for three years. Legally, you say that you don’t have any money left. Because of this, the government will be obliged to see to it that your claim is true.
You will also not be able to touch your assets, since you technically do not own anything. This is the reason why declaring bankruptcy should be the last resort in business debt elimination.
What are the implications of declaring bankruptcy? Well, bankruptcy is an admission of defeat. You are essentially saying that there is no way you can recover financially. Declaring bankruptcy is essentially like saying that you have no future left in a certain business. This type of business debt elimination not only kills your debt, it also kills your future. Why, you ask? Well, business relies heavily on reputation. If you declare bankruptcy, that declaration will stay with you in your future. This would dissuade customers from doing business with you. Thus, your future chances in the same industry are killed.
2) Payment – Of course, one reason for business debt elimination can be payment. This happens rarely in companies. Often, the only time that a company will be able eliminate all of its debts is upon liquidation. This is when the company ends its existence, sells all of its assets, and uses the cash to pay off creditors.
However, companies may find themselves in situations when they really have no liabilities left. This means that the business has been performing efficiently and that it was able to manage its finances wisely. This type of business debt elimination is much sought-after by different companies.
Most often, this will happen if the company does not rely on credit for its normal operation. When a company pays cash for all of the raw materials used in production, the company will have no debts to pay off. However, this means that the company should have a huge starting capital. This is because raw materials cost a lot of money and companies are often unable to pay in cash until the production has begun and they have sold the product made from the raw materials.
This type of business debt elimination is very desirable and should be the aim of every company. However, it may be described by some people as being too idealistic. The fact is businesses have debts. That is the reason why balance sheets have a column for the liabilities.